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USMCA to replace NAFTA treaty references

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Tax Hot Topics newsletter The IRS released Announcement 2020-6 on May 19, 2020, providing that it will interpret references to the North American Free Trade Agreement (NAFTA) as being replaced by the United States-Mexico-Canada Agreement (USMCA) when the new agreement goes into force. Specifically, for purposes of applying an applicable U.S. income tax treaty, the IRS believes that any reference to NAFTA in a U.S. bilateral income tax treaty should be interpreted as a reference to the USMCA. The announcement also provides that the IRS will reach out to countries that have an applicable tax treaty containing references to NAFTA to confirm that they agree with this interpretation.

This announcement is important for taxpayers relying on certain tests in the “Limitation on Benefits” (LOB) article of a relevant bilateral income tax treaty. Most U.S. bilateral income tax treaties contain LOB articles that provide provisions designed to prevent entities resident in a treaty jurisdiction from inappropriately accessing tax treaty benefits. Many LOB articles in U.S. bilateral income tax treaties provide a series of objective tests pursuant to which a resident may qualify for a treaty benefit provided such resident meets all other requirements specified in the treaty for claiming the benefit. A number of these LOB tests contain explicit references to NAFTA in various contexts (e.g., stock exchanges located in the United States or another country party to NAFTA, certain ultimate owners must be resident in a NAFTA country). Taxpayers were concerned that, in situations where they were relying on a LOB article that referenced NAFTA, such benefits would no longer be available if the NAFTA were to be replaced with the USMCA. However, the announcement quells concerns of taxpayers and indicates the IRS’s view that any reference to NAFTA should be interpreted as being to USMCA.

Taxpayers should also be aware that a similar issue exists with respect to the United Kingdom’s departure from the European Union (EU). Similar to the NAFTA references, many treaties with European counterparties include similar references to the EU. With Brexit, similar concerns exist as to the qualifications for treaty benefits under an LOB article where the taxpayer was relying on the UK being a member of the EU. See Grant Thornton’s prior coverage on this issue and the USMCA here.

Contacts:
David Sites
Partner
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Yasmin Dirks
Manager
Washington National Tax Office
T +1 202 521 1506

Mike Del Medico
Manager
Washington National Tax Office
T +1 202 521 1522

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